China's benchmark index has now lost all of its yearly gains after a relentless ascent that saw its valuation rise to record levels earlier this year.

Asian markets crashed on the news, with Japan's Nikkei closing down 4.5pc and entering official "correction" territory. Hong Kong's Hang Seng sank 5.2pc, its steepest sell-off in 30 years.

Emerging markets, most exposed to a waning Chinese economy, saw their currencies continue an abysmal summer rout. Russia's rouble fell to an all-time low of 70.74 to the dollar, despite desperate attempts by the Kremlin to prop up its value.

"Stock markets are falling apart at the seams"

Contagion quickly spread west, decimating European indices, which all suffered record post-crisis losses. The FTSE 100 dropped 4.7pc, wiping £74bn off its market capitalisation and capping its worst one-day performance since March 2009.

The index staged a minor rebound, having lost more than £55bn in the first two hours of morning trading. Britain's benchmark index has now collapsed by 17pc since hitting a high of 7,104 in April and is slipping towards official bear market territory, defined as a 20pc decline from its peak.

"Stock markets are falling apart at the seams," said Jasper Lawler at CMC Markets.

"There was one point today when there just seemed to be no buyers and markets just went into freefall."

Fears soon engulfed Wall Street, where the Dow Jones lost 1,000 points minutes after the opening bell. Pre-market futures trading in the Dow and the S&P 500 had to be suspended as investors became embroiled in a manic sell-off.

In a day of wild swings, the S&P500 was the biggest faller, closing -3.82pc and officially entering correction trading for the first time this year. It was followed by the Dow which traded in the red by -3.56pc.

"Dealers don’t know what to do with themselves because the market moves are so enormous and erratic, and their levels of fear are outweighing their greed," said David Madden at IG.

The VIX "fear index" - a measure of market volatility - rocketed to its highest level since November 2011.

The risk-off sentiment saw a rally in US treasury bonds, where yields dipped below 2pc for the first time since April as money flocked into perceived "safe havens". The dollar, which has been on a sustained bull run ahead of an expected interest rate rise from the Federal Reserve, collapsed to a seven-month low against the euro.

Investors have been spooked by a cocktail of worries over China's "hard-landing", declining commodity prices and a premature rate hike from the Federal Reserve.

Larry Summers, a former US Treasury Secretary and one-time candidate to take over the top job at the central bank, said the events had the hallmark of previous summer ruptures in the markets.

"As in August 1997, 1998, 2007 and 2008 we could be in the early stage of a very serious situation," tweeted Mr Summers.

As in August 1997, 1998, 2007 and 2008 we could be in the early stage of a very serious situation.

Markets have now slashed their probability of a September rate hike from the Fed to 24pc, from a peak of 50pc earlier this month. Analysts at Barclays shifted their forecast for the first tightening in eight years to March 2016.

The renewed mini sell-off in US equities late in trading was driven by comments from Federal Reserve policymaker Dennis Lockhart that a lift-off would still be on the cards this year. The hawkish Mr Lockhart said the picture had been complicated by falling oil prices, the yuan devaluation and shifts in the value of the US dollar. He added that any normalisation would be "gradual".

"The collapse of the equity bubble tells us next to nothing about the state of China’s economy"